General Motors Co quarterly report, Q3 FY2013

General Motors Company — Q3 2013 Form 10-Q

Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results include global automotive operations and GM Financial. Comparisons are with the same 2012 periods unless noted.

Financial performance

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Total revenue	$38.983B	$37.576B	$114.942B	$112.949B
Operating income	$2.256B	$1.603B	$4.966B	$4.420B
Net income attributable to stockholders	$1.717B	$1.833B	$4.306B	$4.994B
Net income attributable to common stockholders	$698M	$1.476B	$2.857B	$3.967B
Diluted EPS	$0.45	$0.89	$1.82	$2.38
Income tax expense	$842M	$357M	$1.993B	$814M

Q3 automotive revenue grew 2.9%; GM Financial revenue rose 67.9%, mainly reflecting acquired Ally international finance operations and a larger lease portfolio. Total revenue increased 3.7%.
Q3 automotive gross margin was $4.954B, about 13.0% of automotive revenue, versus $4.327B, about 11.7%, a year earlier. Operating margin was about 5.8% versus 4.3%.
Automotive adjusted EBIT was $2.395B in Q3, up from $2.097B. GMNA adjusted EBIT increased to $2.187B; GME remained loss-making at $214M; GMIO fell to $299M; and GMSA rose to $284M.
For the first nine months, automotive adjusted EBIT was $6.003B, essentially level with $6.000B. GMNA was $5.577B, GME lost $499M, GMIO earned $1.022B, and GMSA earned $300M.
China joint ventures contributed $425M of equity income in Q3 and $1.391B for nine months. This income is reported on the equity-method line, not as consolidated JV revenue.
Cash flows for the nine months: operating cash flow $9.572B, investing cash outflow $10.589B, financing cash inflow $3.319B, and cash increased $1.933B to $20.355B. Automotive operating cash flow was $8.269B; automotive free cash flow was $2.499B, down from $3.152B.
At September 30, cash and cash equivalents were $20.355B and current marketable securities were $8.215B. Automotive available liquidity was $37.326B, including $10.512B of facility availability. GM Financial separately reported available liquidity of $3.910B.
Debt included $8.448B of automotive debt and $23.675B of GM Financial debt, or approximately $32.1B combined. GM Financial debt rose substantially with the Ally acquisitions and expansion of receivables.

Changes, unusual items, and management outlook

Q3 and nine-month common-stockholder earnings and EPS were reduced by the September purchase of 120 million Series A preferred shares from the New VEBA for $3.2B. The $816M charge reflected consideration above carrying value. GM financed the transaction in part by issuing $4.5B of senior unsecured notes.
Nine-month net income attributable to stockholders fell year over year despite higher revenue and operating income. Higher tax expense—primarily following the release of U.S. and Canadian deferred-tax valuation allowances in 2012—and lower non-operating income were key factors. The 2012 comparison also included larger goodwill impairment charges.
GM recorded $60M of goodwill impairment in the first nine months, related to GM Korea; GM cited weak export-market conditions, raw-material costs, and unfavorable exchange rates. Europe remained loss-making despite improved adjusted results; management said it expected continued regional losses and did not expect European conditions to improve significantly in the foreseeable future.
GM Financial completed most Ally international finance acquisitions during 2013; the Brazil operations closed October 1 for $611M. The planned acquisition of Ally’s interest in GMAC-SAIC in China remained subject to approvals and was expected in 2014 for approximately $900M.
Management said available liquidity and operating cash flows were expected to meet liquidity needs. It identified annual capital spending of approximately $8B, debt service, the remaining Ally-related purchase, and Series A preferred dividends and potential redemption as material cash requirements. The remaining Series A shares become redeemable on or after December 31, 2014; their liquidation amount was $3.9B.
Management described ongoing strategic reviews in certain GMIO countries and warned that deterioration or resulting actions could lead to material impairment or other charges. The Bochum, Germany plant was planned to end vehicle and transmission production by the end of 2014; severance costs were uncertain. GM had not provided a specific consolidated earnings forecast in the supplied filing text.
Key exposures include continued weakness and overcapacity in Europe; foreign-exchange restrictions and possible further devaluation in Venezuela; product quality, warranty and recall costs; pension assumptions; supplier and financing availability; and acquisition integration. GM estimated a further Venezuelan bolivar devaluation of 1.40 bolivars per U.S. dollar could cause about a $100M charge.

Contingencies and other matters

GM Korea hourly wage litigation involved more than 10,000 employees. GM had accrued $784M and reported no reasonably possible loss above that amount for those cases; separate salaried-employee cases had $153M of reasonably possible exposure above accruals.
Other disclosed matters included a UAW claim seeking $450M, with no accrual, and a Canadian former-dealer class action for which liability was uncertain and no loss range could be estimated. The Nova Scotia-related dispute was settled for $50M, subject to remaining court approval.
Recorded environmental liabilities were $155M; estimated remediation losses ranged from $120M to $230M. Maximum potential obligations under guarantees were reported at $16.0B, including Ally-related repurchase obligations; the recorded guarantee liability was much smaller.
GM identified an emissions-compliance issue with the Tavera in India and said the ultimate impact could not yet be determined. It also said it was reasonably assured it would meet the requirements of Brazil’s excise-tax incentive program.
Moody’s upgraded GM’s corporate rating to investment grade in September 2013; Fitch and S&P rated the corporate credit below investment grade, both with positive outlooks. GM reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether the preferred-share purchase’s $816M common-earnings charge, recurring preferred dividends, and future redemption obligations are reflected appropriately in per-share comparisons and capital-return expectations.
Whether automotive cash generation can sustain planned capital spending of about $8B annually while meeting debt, pension, and preferred-stock obligations.
GM Financial’s acquired receivables, loan-loss allowance, funding costs, credit performance, and dependence on securitization and other funding sources; its North American consumer portfolio was predominantly subprime by GM Financial’s stated FICO definition.
Progress in Europe restructuring and the financial consequences of Bochum closure, as well as GMIO strategic reviews and potential impairments.
Developments in the GM Korea wage cases, dealer and UAW litigation, environmental remediation, Venezuelan exchange controls, and the India emissions issue.
Acquisition integration and remaining approvals, including the expected GMAC-SAIC transaction, and whether reported liquidity is practically available across subsidiaries and jurisdictions.